Question 1

What is the interest expense on the bonds in 2012?

Accepted Answer

A)   $693,103.
B)   $600,000.
C)   $345,639.
D)   $347,464.E) C) and D)
F) None of the above

Question 2

The stated interest rate does not change over time.

Accepted Answer

A) True 
 B)False

Question 3

Interest expense is calculated as the carrying value times the market rate.

Accepted Answer

A) True 
 B)False

Question 4

Contrast the following types of bonds:
(a) Secured and unsecured.
(b) Term and serial.
(c) Callable and convertible.

Accepted Answer

(a) Secured bonds are supported by assets pledged as collateral. Unsecured bonds, also referred to as debentures, are not backed by a specific asset. (b) Term bonds require payment of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. (c) Callable bonds allow the issuer to repay the bonds before their scheduled maturity date at a specified call price. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

Question 5

The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:

Accepted Answer

A)   A credit of $6 million to a gain account.
B)   A debit of $6 million to a loss account.
C)   No gain or loss on retirement.
D)   A debit to cash for $42 million.E) A) and B)
F) A) and C)

Question 6

On January 1, 2012, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year.
1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

Accepted Answer

1. Premium. The issue price is...

Question 7

The times interest earned ratio compares interest expense with income available to pay interest charges.

Accepted Answer

A) True 
 B)False

Question 8

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

Accepted Answer

A)   Carrying value and interest expense increase.
B)   Carrying value and interest expense decrease.
C)   Carrying value decreases and interest expense increases.
D)   Carrying value increases and interest expense decreases.E) C) and D)
F) All of the above B

Question 9

The mixture of liabilities and stockholders' equity a business uses is called its:

Accepted Answer

A)   Bond contract.
B)   Indenture agreement.
C)   Capital structure.
D)   Accounting equation.E) All of the above
F) A) and B)

Question 10

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

Accepted Answer

A)   Face rate.
B)   Yield rate.
C)   Market rate.
D)   Stated rate.E) None of the above
F) A) and B)

Question 11

Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of Valentino's stock is $35 per share.
1. Explain why Valentino's might choose to issue convertible bonds.
2. Explain why investors might choose Valentino's convertible bonds.

Accepted Answer

1. Convertible bonds sell at a higher pr...

Question 12

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 13

What is the annual stated interest rate on the bonds?

Accepted Answer

A)   3%.
B)   3.5%.
C)   6%.
D)   7%.E) B) and C)
F) C) and D)

Question 14

X2 issued the bonds for:

Accepted Answer

A)   $100,000.
B)   $107,000.
C)   $104,212.
D)   Cannot be determined from the given information.E) B) and D)
F) B) and C)

Question 15

In each succeeding payment on an installment note:

Accepted Answer

A)   The amount of interest expense increases.
B)   The amount of interest expense decreases.
C)   The amount of interest expense is unchanged.
D)   The amounts paid for both interest and principal increase proportionately.E) A) and D)
F) A) and C)

Question 16

Which of the following is not true regarding callable bonds?

Accepted Answer

A)   This feature allows the borrower to repay the bonds before their scheduled maturity date.
B)   This feature helps protect the borrower against future decreases in interest rates.
C)   Callable bonds benefit the bond investor.
D)   A bond can be both callable and convertible.E) C) and D)
F) A) and C) C

Question 17

When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time.

Accepted Answer

A) True 
 B)False

Question 18

THA issued the bonds for:

Accepted Answer

A)   $200,000.
B)   $194,758.
C)   $242,000.
D)   Cannot be determined from the given information.E) B) and C)
F) All of the above

Question 19

Which of the following is true for bonds issued at a discount?

Accepted Answer

A)   The stated interest rate is greater than the market interest rate.
B)   The market interest rate is greater than the stated interest rate.
C)   The stated interest rate and the market interest rate are equal.
D)   The stated interest rate and the market interest rate are unrelated.E) A) and C)
F) All of the above

Question 20

What is the carrying value of the bonds as of December 31, 2013?

Accepted Answer

A)   $8,834,770.
B)   $8,686,606.
C)   $8,734,070.
D)   $8,783,433.E) C) and D)
F) A) and B)

Exam 9: Long-Term Liabilities

What is the interest expense on the bonds in 2012?

Correct Answer
verified

The stated interest rate does not change over time.

Correct Answer
verified

Interest expense is calculated as the carrying value times the market rate.

Correct Answer
verified

Contrast the following types of bonds: (a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible.

The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:

Correct Answer
verified

Correct Answer
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1. Premium. The issue price is...
View Answer

The times interest earned ratio compares interest expense with income available to pay interest charges.

Correct Answer
verified

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

Correct Answer
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B

The mixture of liabilities and stockholders' equity a business uses is called its:

Correct Answer
verified

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

Correct Answer
verified

Correct Answer
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1. Convertible bonds sell at a higher pr...
View Answer

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

Correct Answer
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What is the annual stated interest rate on the bonds?

Correct Answer
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X2 issued the bonds for:

Correct Answer
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In each succeeding payment on an installment note:

Correct Answer
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Which of the following is not true regarding callable bonds?

Correct Answer
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C

When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time.

Correct Answer
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THA issued the bonds for:

Correct Answer
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Which of the following is true for bonds issued at a discount?

Correct Answer
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What is the carrying value of the bonds as of December 31, 2013?

Correct Answer
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Exam 9: Long-Term Liabilities

What is the interest expense on the bonds in 2012?

Correct AnswerverifiedShow Answer

The stated interest rate does not change over time.

Correct AnswerverifiedShow Answer

Interest expense is calculated as the carrying value times the market rate.

Correct AnswerverifiedShow Answer

Contrast the following types of bonds: (a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible.

The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:

Correct AnswerverifiedShow Answer

Correct Answerverified1. Premium. The issue price is...View AnswerShow Answer

The times interest earned ratio compares interest expense with income available to pay interest charges.

Correct AnswerverifiedShow Answer

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

Correct AnswerverifiedB

The mixture of liabilities and stockholders' equity a business uses is called its:

Correct AnswerverifiedShow Answer

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

Correct AnswerverifiedShow Answer

Correct Answerverified1. Convertible bonds sell at a higher pr...View AnswerShow Answer

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

Correct AnswerverifiedShow Answer

What is the annual stated interest rate on the bonds?

Correct AnswerverifiedShow Answer

X2 issued the bonds for:

Correct AnswerverifiedShow Answer

In each succeeding payment on an installment note:

Correct AnswerverifiedShow Answer

Which of the following is not true regarding callable bonds?

Correct AnswerverifiedC

When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time.

Correct AnswerverifiedShow Answer

THA issued the bonds for:

Correct AnswerverifiedShow Answer

Which of the following is true for bonds issued at a discount?

Correct AnswerverifiedShow Answer

What is the carrying value of the bonds as of December 31, 2013?

Correct AnswerverifiedShow Answer

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1. Premium. The issue price is...
View Answer

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B

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1. Convertible bonds sell at a higher pr...
View Answer

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C

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